RETAIL GYP! (LOW,JCP,FXI)

Some worrying statistics just crossed our desk, which may or may not be fateful for the rally, but that we feel duty bound to share with you either way.

 

‘May or may not’?

 

That’s right.  Remember, we’re now dealing with a market that has come unhinged, for lack of a better term.  Unhinged it is from most of the fundamental markers that Wall Street employs, as well as the majority of technical tools that nearly all traders have become accustomed to.

 

And so, in the end, there may be nothing to what follows.  The indexes now appear to have a mind of their own, and are following their own, inscrutable logic, and will likely continue to do so, just as we said they would as the final blowoff top begins.

In the coming months, the zigs and zags will come at a steeper, more tempestuous pace and will careen and dive with a quickness heretofore unknown to this generation of investors.  And it will all transpire because waves of cash will enter and exit the market FOR NO APPARENT REASON!  That is, reasons will be offered, but they won’t be predicated on the traditional indications we’ve grown used to.

 

And it’s with that in mind, that we now proceed to the following –

 

  1. Retail sales just CRASHED…

The above data was supplied by the Bank of America’s number gatherers – not official government agency stats – and show that the collapse in department store spending was the biggest on record.  Ever.

 

Is that something you should worry about?

 

Maybe, but if so, the market hasn’t yet digested it.

 

By the way, overall retail spending was also down, and the breakdown came in as follows –

The wide divergence between department store and home improvement sales is noteworthy and is likely connected to the recent upsurge in housing activity, in which both sales and prices have been rising.

 

That’s that.

 

Now how about this one…

 

  1. The Wall Street Journal informs us that retail investors have entered the market in the last week at a pace and with a zeal that we’ve never seen.

 

Take a look here –

At the far end of the chart you can see what’s been happening.  And from a contrarian perspective, that might be alarming.  Unless, of course, we get several more giddy weeks just like this one, that push markets higher like a clumsy frat boy getting his first.

 

But not only that.

 

  1. It appears that Ma and Pa’s timing in entering the market is just dreadful. The chart below indicates that the net speculative position on equities just flopped from long to short FOR THE FIRST TIME SINCE THE ELECTION IN NOVEMBER.

 

Take a peek –

That is to say, the big speculative cash spent the last sixteen weeks buying the market hand over fist (in green).

 

And now they’ve stopped.

 

Worried yet?

 

Why?  It could be that next week they’ll reverse course again and put on longs like it’s Sangria time in Tangier!

 

So what do we do?  Who do we trust?

 

A fair question, my pretty little throat lozenge.  Perhaps you want to put your trust in newsletter writers (he added, coyly)?

 

According to the weekly Investors Intelligence survey (that measures investment advisors’ feelings on the market), 63.1% of Wall Street newsletter writers were bullish in the week that passed – the HIGHEST READING FOR THE SURVEY SINCE 1987, just prior to that year’s devastating crash.

 

Hmm…

 

More contrarian bait, to be sure.  But in truth, is there anything to be done with it?  Are we now at a genuine turning point, or will the above numbers have to swell to historically unrecognizable levels before we actually see this market roll over and get fed to the hounds?

 

Our feeling is the latter.

 

And we beg forgiveness if this sounds repetitive, but it’s worthwhile hearing at least once more.  We will see unprecedented extremes across the quantitative, technical and valuation spectra as the final top approaches, such that normal ranges for these data will no longer apply.  There will be almost no traditional measures remaining upon which to rely, and experience and savvy will be among the only means of protecting one’s capital, let alone turning a fresh buck.

 

In short, it’s about to become extraordinarily difficult to navigate the swells and tides that are presently rolling about us.

And with that, we turn to a trade that requires your attention.

 

Back on October 18th, just weeks before the election, we urged you to put on a China trade.  The letter was called Synthetic China, Real Money, and there we recommended you buy the FXI January (2018) 38 CALL for $3.75 and sell the FXI January (2018) 38 PUT for $4.60.  Total credit on the affair was $0.85.

 

And now the landscape is fairer.  The CALL currently sells for $3.50 and the PUT for $2.39.  Sell the former and buy back the latter and you come away with a full $1.96 on nothing spent.  Adjusted for minimal commissions, your take is 1207%.

 

And that’s better than falling in boiling oil!

 

You bet.

 

Your trade for the week is a play on the above noted sales differential between department stores and home improvement stores (see Sector level sales…, above).  We believe the trend will remain as such for some time yet.  So we’re going short the former and long the latter.

 

But we’ve also drilled down to find the worst of the department stores and match it against the best home improvement chain.

 

And the following two outfits emerge as our victims:  Lowe’s (NYSE:LOW), among the country’s biggest home improvement retailers, and JC Penney (NYSE:JCP), among the worst performing stocks anywhere.

 

Have a look –

This is the two retailers since just after the elections.

 

What a difference.

- Content protected for Normandy Executive Lounge, Wall Street Elite, Executive Lounge members only]

The JCP PUT is only 14% out-of-the-money while the Lowe’s PUT is a full 30% out-of-the-money!

 

Looks good!

 

With kind regards,

 

Hugh L. O’Haynew

Share your thoughts...

We encourage people to join in on the discussion. Please keep in mind however, that all comments are moderated according to our comment policy, and all links are nofollow. Let's keep the conversation professional and meaningful.